Waste, Fraud, and Abuse in the Federal Budget

There are widespread complaints about waste, fraud, and abuse in
the federal budget, and there is always reason to strive for improvement in
this area. At the same time, many people believe it is possible to make
substantial cuts in the federal budget, say, by as much as 10%, without having
to cut Social Security, Medicare, or our social safety net, simply by
eliminating waste, fraud, and abuse. There is, in fact, no reason to
believe this is the case.

Specific Instances of Waste, Fraud, and Abuse

This is
particularly so when we are talking about specific instances of waste, fraud,
and abuse in the federal budget such as
$200 hammers or $7,000 coffee pots. This sort of thing just isn’t
important in the grand scheme of things.

The federal budget was $3,603 billion in 2011. Ten percent of $3,603 billion is $360.3 billion. That's 360,300 millions! This means that in order
to reduce the budget by 10% one million dollars at a time we would have to
find 360,300 instances in which one million dollars worth of waste, fraud, or
abuse occurs on an annual basis. We can’t even count to 360,300 let alone find 360,300 ways in which the federal government squanders one million dollars
each year. Even if we could find a new way to save a
million dollars a year every day for a year it would not even make a dent in a
$360.3 billion deficit. We would only be able to save $365 million in
the process, and there are a thousand million in a billion. That means it
would take 2.74 years (1000/365.25=2.73786) just to save $1 billion in this
way. In other words, it would take 986 years to save $360.3
billion at this rate (360,300/365.25 = 986.4), and it would take almost 100 years
(986.4/10=98.46) to save this amount if we were to save $10 million a year
per day.
And even when there are specific instances of waste, fraud, and abuse that run
in the hundreds of millions or even billions of dollars the numbers just don't
add up to $360.3 billion per year, and it's just silly to think that they do. (Coburn
Sanders
MFCU
NYT
StLuisFed)

When we look at Figure 1 which shows how the federal budget is actually spent in the real world the numbers become even more problematic.

Payments For Individuals made up 63% of the budget in 2012, the bulk of
which are to be found in the Retirement (Social Security, 21% of the
budget, and military and other federal employee retirement benefits, 5%),
Healthcare (Medicare 14%; Medicaid, 7%; and Military and veterans' health
programs, 1.4%), and Aid to Needy (programs that aid the working poor,
poor children, and indigent elderly or disabled adults such as the Food
Stamps, School Lunch, and other nutrition programs, 2.9%; Earned Income and
Child Tax Credits, 2.1%; Supplemental Security Income, 1.2%; Housing
Assistance, 1.1%; Temporary Assistance to Needy Families, 0.6%; and Daycare
and Foster Care/Adoption Assistance, 0.3%) slices of the budget in Figure 1.

While there may be some inefficiencies in the administration of the
programs in this 63% of the budget, administrative costs are relatively
insignificant compared to the benefits paid out. Medicare's administrative
costs, for example, are as little as
2% of the benefits it pays out and Social Security's
as little as 1%. These two
programs alone took up 35% of the total budget in 2012, and even if we were to
eliminate all of their administrative costs, which we can't do and still make
these programs work, it would reduce the total budget by less than 1% (0.02 x 0.35 = 0.007
= 0.7%).

This means that in
order to find significant amounts of waste, fraud, and abuse in this 63% of
the budget we have to look at the tens of millions of beneficiaries whose
benefits average in the thousands of dollars. Now we are talking about
the need to find millions of instances of waste, fraud, and abuse in the
thousands of dollars range, not just hundreds of thousands in the millions of
dollars range.

There is no way we
can expect to do this without expanding the size of the federal bureaucracy,
and since it costs money to expand the federal bureaucracy, there is no
guarantee we will be able to reduce the budget at all by doing this even if by
doing this we are able to eliminate all of the waste, fraud, and abuse that
may exist among the tens of millions of beneficiaries these programs serve.
It may even cost more to expand the bureaucracy than can be saved. (Lindert)
This is especially so in light of the fact that there doesn't seem to be any
reason to believe that waste, fraud, and abuse is very widespread among these
beneficiaries in the first place.

The nature of this problem can be seen
by examining
a report published by the
Federal Reserve Bank of St. Louis in which it estimated that some $3.3
billion worth of fraudulent unemployment compensation claims were paid in
2011. That works out to 3.06% of the total $108 billion worth of
claims that were paid out in 2011 in a program that had 3.7 million
beneficiaries in that year. The point is that we can't simply
eliminate this $3.3 billion worth of fraudulent unemployment compensation
claims by waving a wand or by increasing the amount of money we spend to
investigate those few who are actually committing this fraud, 88,000 of
which were collecting benefits while working part time and being paid
under the table. We have to investigate all of the 3.7 million
beneficiaries in order to find those few, and this can't be done without
paying people to do it.

Since the $108 billion in unemployment
compensation claims amounted to only 3% of the $3,603 billion federal
budget in 2011, and only 3.06% of this 3% was wasted in specific instances
of fraud, that works out to 0.09% of the entire federal budget that was
wasted in fraudulently collected unemployment claims (.0306 x .03 =
.000917 = 0.09%).

This means that even if we are
successful in eliminating all of the $3.3 billion in fraudulent
unemployment compensation claims in the system, the most we can save by
doing this is less than 0.09% of the total budget, and if it costs us more
than $3.3 billion to expand the bureaucracy in order to eliminate this
0.09% of the total budget it will actually cost us more to eliminate this
fraud than we can save. It also means that if we were to find
similar rates of fraud (3.06%) in the rest of the 63% of the budget taken up by
payments to individuals the most we can save by eliminating this fraud is 1.9% of the
total budget (.0306 x .63 = .019215 = 1.9%), and if it costs us more than $69
billion (.0306 x .63 x 3,603 = 69.4586) to expand the bureaucracy in order to
do this, it will cost us more than we can save.

This doesn't mean we shouldn't try to
eliminate waste, fraud, and abuse in this portion of the budget wherever
and whenever we can. It only means we should not expect to be
able to save $69 billion or reduce the federal budget by as much as 1.9%
as a result of our efforts to do so.

Defense

As for the restof the budget, there is no reason to believe
that significant savings can be found there either. It is apparent from
Figure 1 that there may be room to make additional cuts in the 19% of the
budget that goes to
Defense. After all, Defense today is barely below where it stood
in 1980 relative to the size of our economy when we were still waging the Cold War against the Soviet Union, and
with the end of the wars in Iraq and Afghanistan there should be room to
maneuver. Just the same, there is no reason to think we can cut our
total tax bill by as much as 10% simply by cutting Defense. Even if we were to cut
the defense budget in half—which
few people would be willing to do—it would only reduce the total federal budget by
about 10%. Waste,
fraud, and abuse or not,
virtually no one is willing to cut defense by a sufficient amount to make a
significant difference in the size of the total budget.

Since Interest on the national debt must be paid when it comes due
there is nothing can be saved there. That leaves only the 12% of the
budget in the Everything Else slice of the pie in Figure 1. Here
we are talking about the 2.6% of the budget spent on Transportation, the 2.5%
spent on Education, the 1.3% spent on International Affairs, the 1.1% spent on
Environmental Protection, 0.8% spent on Science and Technology, 0.8% spent on
General Government, 0.7% spent on Community Development, 0.5% spent on
Agriculture, and 0.4% spent on Energy.

As is shown in Figure 2, the Everything Else slice of
the budget has been cut from 24% of the budget and 5.4% of the economy in
1980s to just 12% of the budget and 2.9% of the economy in 2012. The programs in this portion of
the budget have been cut dramatically as a fraction of the budget and relative
to the economy since 1980 and are below where they were back in
1960. Virtually all of the programs in the Everything Else
slice have been cut to the bone since 1980,
and there is little reason to believe that substantial savings can be realized
by reducing whatever waste, fraud, and abuse that may still exist in whatever
is left in this portion of the budget today.

In
searching for ways to cut the federal budget it is important to understand
that cutting a
small amount from a large portion of the budget or a large amount from a small portion of the budget may yield a lot of money in absolute terms, but it
doesn't yield a lot of money relative to the size of the total budget. It only reduces the
total budget by a small amount. To reduce the total budget by a large amount
we have to cut a large amount from a large portion of the budget. That's just
grade school arithmetic.

When we
look at the actual expenditures in the federal budget we find that it is not possible to cut a large amount from a large
portion of the budget without cutting defense, Social Security, Medicare, or
the programs that make up our social safety net because that's where the
money is. The rest of the budget has already been cut to the bone since 1980,
and there simply isn't enough money in the rest of the budget to make a
difference even if we cut a large amount from this small portion of the budget.

When we
look at the way the money is actually spent by the federal government we
find that there is no reason to believe we can reduce the size of the federal
budget by increasing our efforts to target specific instances of waste, fraud,
and abuse. Even though we could undoubtedly save billions of dollars by
targeting waste, fraud, and abuse among
military equipment suppliers and
Medicare providers, there simply aren't enough specific instances of waste,
fraud, and abuse in the budget that are of sufficient magnitude to make a
difference in this regard. At best, all we can hope to do by expanding
our efforts in this area is cut a small amount from a large portion of the
budget, and doing this could actually cost us more to do than we can save by
doing it. (Lindert) As was noted above, this does
not mean we should ignore this problem. It only means that we
should not expect to see a substantial reduction in the size of the budget as
a result of our efforts to solve it. Those who think otherwise
have a problem with arithmetic. Their numbers just don't add up.
(CoburnSanders
MFCU
NYT
StLuisFed
CBS)

The simple fact is
that we cannot cut the federal budget by as much as 10% without cutting Social Security, Medicare, or our
social safety net, simply by eliminating waste, fraud, and abuse.
Another simple fact is that we cannot have the
essential services that only government can provide without paying the taxes needed to fund those services. If
we want to maintain Social Security, Medicare, our social safety net, and all
of the other services the government provides, we have to pay for them, and
the way we pay for them is by paying taxes. It's just that simple.